BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENT Fabio Barbosa Secretary of the National Treasury Inter-American Development Bank Washington,D.C., April 2001 FEDERATIVE REPUBLIC of BRAZIL Ministry of Finance - National Treasury Secretariat

1. Adjustment and Reforms Towards a New Fiscal Regime 2. Public Debt Management 3. Outlook 1. Adjustment and Reforms Towards a New Fiscal Regime 2. Public Debt Management 3. Outlook BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENT

BRAZILIAN ECONOMY: OVERCOMING MAJOR CHALLENGES –Macroeconomic Stabilization; –International Crises : Mexico, Asia, Russia; –Remarkable transition to the floating exchange rate regime: # Inflation Targeting framework: successful implementation; # Balance of Payments Adjustment: ** Despite the world’s economy slowdown, exports have been growing at impressive rates (March 01 = 15,5%); ** Current Account Deficit financed through FDI; # Economy has rebounded; unemployment is declining; # New Fiscal Regime: ** Strong primary flows; Structural Reforms.

Inflation Targeting Framework Consumer Price Index - IPCA (Annual % )

Current Account Deficit X FDI 1994 a 2001* ( US$ Billion) Current Account Deficit X FDI 1994 a 2001* ( US$ Billion) * 2001: Accumulated 12 months ended in March. Current Account FDI

GDP Growth:

Unemployment Rate IBGE Monthly Employment Research

Central Govt. ( ) Overall Public Sector ( ) % PIB Primary Results

BRAZIL: A NEW FISCAL REGIME BRAZIL: A NEW FISCAL REGIME TOTAL EM EE GC Net Public Sector Debt Source : Source : Central Bank

Strong primary flows must be seen as an integral part of the comprehensive structural reforms agenda, which has been implemented in the last few years. The “fundamentals” of Brazil’s New Fiscal Regime: –Privatization –Administrative Reform –Social Security Reform –State & Municipalities Refinancing Agreements –Fiscal Responsibility Law

BRAZIL: A NEW FISCAL REGIME Privatization: –Since 1991: About US$ 100,4 billion: (*) Proceeds: US$ 82,3 billion (mostly to amortize public debt) (*) Debt Transferred: US$ 18,1 billion. –Positive effects go far beyond debt reduction: (*) Elimination of potential deficits (capitalization, subsidies); (*) Important role in FDI flows; (*) Productivity and efficiency gains; (*) New players in domestic capital markets.

BRAZIL: A NEW FISCAL REGIME Fonte: Banco Central

BRAZIL: A NEW FISCAL REGIME Source: Central Bank

BRAZIL: A NEW FISCAL REGIME Administrative Reform: –Elimination of general job tenure; –Flexible legal regime for civil servants; –Legislative/Judiciary: Salary increases must be approved by Congress. Social Security Reform: –Retirement: “Time of Service” replaced by “Time of Contribution”; –“Benefit Adjustment Factor”: link with minimum age requirements; –Elimination of the partial benefit at early retirement; –New regulatory framework for pension funds; public sector contribution as sponsor cannot be higher than civil servants’; –Retired civil servants contribution (Constitutional Amendment )

BRAZIL: A NEW FISCAL REGIME State & Municipalities Refinancing Agreements: –25 out of 27 states, 180 municipalities; US$ 130 billion program; no arrears; –Main Aspects: # Debt Service Ceiling = 13% of Net Current Revenue (NCR); # Debt Stock Ceiling equivalent to 100% of NCR; # Fiscal Programs, annually revised : Targets for primary surplus, payroll, total debt; # Multi-annual Debt/NCR trajectory; no “new money” while Debt/NCR > 1; # Implementation of Privatization Programs: responded for 30% total results; # State Banks: privatization, closing, transformation into development agencies (BANERJ, BEMGE, CREDIREAL, BANESPA); # Incentives to the establishment of balanced pension funds (RJ, PE, PR).

Primary Results (% GDP) States, Municipalities and State Enterprises

BRAZIL: A NEW FISCAL REGIME Fiscal Responsibility Law: Milestone in Fiscal Management 4Art.35: No more refinancing between different levels of government; 4Budget Guidelines Law (LDO): 3-years targets for fiscal policy; 4Allows for expenditure cuts in other branches of government; 4Debt ceilings for the three levels of government –Federal Government: 3,5 NCR, effective immediately ; –States: 2 NCR; Municipalities 1,2 NCR ; uConvergence period: 15 years; uImplicit reduction of S&M net debt (as of Dec. 2000, 16,3% of the GDP) 4No budget commitment without effective funding; 4Transparency: reports on fiscal management, budget execution, etc.

BRAZIL: A NEW FISCAL REGIME In sum: –A comprehensive structural reforms agenda has been implemented. –The impressive shift in primary flows (about 5% of the GDP if compared to 1997) consolidates the new fiscal regime, thus enhancing the consistency of the Brazilian economic policy : –(*)TARGETS MET FOR 10 CONSECUTIVE QUARTERS Sound macroeconomic policies pave the way to: –A more proactive public debt management strategy; –Development of domestic capital markets.

1. Adjustment and Reforms Towards a New Fiscal Regime 2. Public Debt Management 3. Outlook 1. Adjustment and Reforms Towards a New Fiscal Regime 2. Public Debt Management 3. Outlook BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENT

DOMESTIC DEBT:  Maturity lengthening process : reduction of refinancing risk;  Duration: Gradual replacement of floating rate by fixed rate securities;  Rebuilding of domestic yield curve: Fixed rate (LTN): short term benchmarks: up to 2 years Floating rate (LFT): 5 years Indexed bonds (NTN-C): (3,5,7,10,20 and 30 years)  Standardization of debt instruments; fungibility for floating rate securities; re-offer ; PUBLIC DEBT MANAGEMENT Guidelines

EXTERNAL DEBT  Establishment/consolidation of yield curves in strategic markets; benchmarks in dollar, euro and yen;  Provide and enhance access for other borrowers to the international capital markets;  Gradual substitution of restructured debt (Bradies, Paris Club) by market instruments;  Broadening of the investors base in Brazilian risk. PUBLIC DEBT MANAGEMENT Guidelines

Lengthening of Average Maturity RECENT DEVELOPMENTS: DOMESTIC DEBT

% of Total Debt Maturing in 12 months RECENT DEVELOPMENTS: DOMESTIC DEBT

Replacement of floating rate by fixed rate securities

RECENT DEVELOPMENTS: DOMESTIC DEBT Reduction of Average Funding Cost - Domestic Bonded Debt

External Debt: Yield Curves

EXTERNAL DEBT Source: National Treasury Secretariat Structure by Holders- Feb/2001 Currency Composition - Feb/2001 Stock outstanding in March / ,6% PIB

ANNUAL BORROWING PLAN (ABP) STRATEGY FOR 2001 Basic Parameters: Projected Debt Service 2001 *: R$ 201,8 billion Fiscal resources budgeted: R$ 54,4 bilhões Gross Borrowing Requirements: R$ 147,4 bilhões Hipotheses: a) 100% roll-over of dollar linked securities; and b) bond issuance in international capital markets: US$ 6 billion * As of December 31, 2000 Basic Parameters:  Projected Debt Service 2001 *: R$ 201,8 billion  Fiscal resources budgeted: R$ 54,4 bilhões  Gross Borrowing Requirements: R$ 147,4 bilhões  Hipotheses: a) 100% roll-over of dollar linked securities; and b) bond issuance in international capital markets: US$ 6 billion * As of December 31, 2000

ANNUAL BORROWING PLAN (ABP) STRATEGY FOR 2001

Estimated Results (Base Case)

ANNUAL BORROWING PLAN (ABP) 1st. Quarter Results

1. Adjustment and Reforms Towards a New Fiscal Regime 2. Public Debt Management 3. Outlook 1. Adjustment and Reforms Towards a New Fiscal Regime 2. Public Debt Management 3. Outlook BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENT

OUTLOOK 4GDP Growth: –Average 2000/2002: above 4.0% p.a.; –Further decline of unemployment rate: uAverage Rate in 2001 below 7.0% (1999, 7.6% , 7.1%); 4Balance of Payments: –Current Account Deficit: close to 2000 level, mostly (80%) financed through FDI; 4Inflation: –IPCA 2001 = 4.0% (+ ou - 2.0%) –IPCA 2002 = 3.5% (+ ou - 2.0%)

OUTLOOK (cont.) 4Fiscal Policy: –Structural adjustment: reforms implemented; –Privatization/IPO/concessions; –Annual Primary Surpluses: 2001 to 2004: 3.0% of the GDP –6 consecutive years:primary surpluses of,at least, 3.0 % of the GDP. Primary Result - Public Sector* (%GDP) *Primary Surplus for 2004 in LDO 2001 considers the same trend observed between 2002 and 2003

OUTLOOK (cont.) 4Public Debt Management –Average Maturity Lengthening: Dec/2001 = 42,9 months –Duration: gradual increase of share and average maturity of fixed rate instruments; –Consolidation of long term benchmarks ( NTN-C): uFocus on intermediate maturities (today’s auction - 20yr;10.7%p.a.) uStandardization of debt instruments. –Internet Sales : Small investor, enhancing perception about public debt (Brazilian Treasuries: a first class asset).

OUTLOOK (cont.) Economic Policy: Consistency, Flexibility and Reaction 4Recent Turbulences: –Fundamentals must prevail; 4Immediate Policy Response: –Primary surplus targets increase for 2002/2004 (LDO for 2002); –Tightening of monetary policy; exchange rate flexibility; –Tactical adjustment of auctions schedulle.

BRAZIL: RECENT DEVELOPMENTS IN FISCAL POLICY AND PUBLIC DEBT MANAGEMENT Fabio Barbosa Secretary of the National Treasury Inter-American Development Bank Washington-DC, April de 2001 FEDERATIVE REPUBLIC of BRAZIL Ministry of Finance - National Treasury Secretariat